From Eric Paley:
So are ideas worthless? I wouldn’t go that far.
Every company needs a starting point. I encourage entrepreneurs to focus more on falling in love with the problems they want to solve rather than their initial ideas. As founders dig deeply into that original hypothesis, they will learn, adapt, hit walls, adapt again, and build critical expertise that they never considered when starting out.
The launch of Windows 8 — after a half-decade or so of tablets and smartphone — failed to arrest and, indeed, accelerated the major drift that was happening away from a WinTel world. The FT reports the biggest ever drop (14%) in PC sales in the first quarter, noting in a quote by Bob O’Donnell, an IDC analyst:
“At this point, unfortunately, it seems clear that the Windows 8 launch not only failed to provide a positive boost to the PC market, but appears to have slowed it. The radical changes to the [user interface], removal of the familiar Start button, and the costs associated with touch have made PCs a less attractive alternative to dedicated tablets and other competitive devices.”
In essence, Windows is playing too far off its own turf now to catch up.
Like the effect of continental breakup and the resultant effect on evolutionary diversity of birds and mammals, I think Levie gets its right today when he tweeted:
The effect of a drop in PC sales is far-reaching: less PCs -> less MS dominance -> more heterogeneity -> more startup opportunity
Fred put it well today:
And I also know that putting powerful tools in the hands of “everyman” produces more innovation than can happen when the tools are limited to mathematicians and scientists.
So the question becomes: what is the Tumblr or Blogger or WordPress of X? (where X is a powerful technique one wants to bring to everyman)
Paul Graham charts an epic trail to where good ideas and bad ideas emerge and diverge.
I hope to expand on some of his points over the next few weeks, but in the meanwhile here are some excerpts. It’s definitely worth going back to the original piece, because different parts are relevant to different potential founders. These excerpts are most relevant to me:
The very best startup ideas tend to have three things in common: they’re something the founders themselves want, that they themselves can build, and that few others realize are worth doing. Microsoft, Apple, Yahoo, Google, and Facebook all began this way.
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Why do so many founders build things no one wants? Because they begin by trying to think of startup ideas. That m.o. is doubly dangerous: it doesn’t merely yield few good ideas; it yields bad ideas that sound plausible enough to fool you into working on them.
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When a startup launches, there have to be at least some users who really need what they’re making—not just people who could see themselves using it one day, but who want it urgently. Usually this initial group of users is small, or the simple reason that if there were something that large numbers of people urgently needed and that could be built with the amount of effort a startup usually puts into a version one, it would probably already exist. Which means you have to compromise on one dimension: you can either build something a large number of people want a small amount, or something a small number of people want a large amount. Choose the latter. Not all ideas of that type are good startup ideas, but nearly all good startup ideas are of that type.
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Nearly all good startup ideas are of the second type. Microsoft was a well when they made Altair Basic. There were only a couple thousand Altair owners, but without this software they were programming in machine language. Thirty years later Facebook had the same shape. Their first site was exclusively for Harvard students, of which there are only a few thousand, but those few thousand users wanted it a lot.
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But while demand shaped like a well is almost a necessary condition for a good startup idea, it’s not a sufficient one. If Mark Zuckerberg had built something that could only ever have appealed to Harvard students, it would not have been a good startup idea. Facebook was a good idea because it started with a small market there was a fast path out of. Colleges are similar enough that if you build a facebook that works at Harvard, it will work at any college. So you spread rapidly through all the colleges. Once you have all the college students, you get everyone else simply by letting them in.
Similarly for Microsoft: Basic for the Altair; Basic for other machines; other languages besides Basic; operating systems; applications; IPO.
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So if you can’t predict whether there’s a path out of an idea, how do you choose between ideas? The truth is disappointing but interesting: if you’re the right sort of person, you have the right sort of hunches. If you’re at the leading edge of a field that’s changing fast, when you have a hunch that something is worth doing, you’re more likely to be right.
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Being at the leading edge of a field doesn’t mean you have to be one of the people pushing it forward. You can also be at the leading edge as a user. It was not so much because he was a programmer that Facebook seemed a good idea to Mark Zuckerberg as because he used computers so much. If you’d asked most 40 year olds in 2004 whether they’d like to publish their lives semi-publicly on the Internet, they’d have been horrified at the idea. But Mark already lived online; to him it seemed natural.Paul Buchheit says that people at the leading edge of a rapidly changing field “live in the future.” Combine that with Pirsig and you get:
Live in the future, then build what’s missing.
That describes the way many if not most of the biggest startups got started. Neither Apple nor Yahoo nor Google nor Facebook were even supposed to be companies at first. They grew out of things their founders built because there seemed a gap in the world.
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And when these problems get solved, they will probably seem flamingly obvious in retrospect. What you need to do is turn off the filters that usually prevent you from seeing them. The most powerful is simply taking the current state of the world for granted. Even the most radically open-minded of us mostly do that. You couldn’t get from your bed to the front door if you stopped to question everything.
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Just as trying to think up startup ideas tends to produce bad ones, working on things that could be dismissed as “toys” often produces good ones. When something is described as a toy, that means it has everything an idea needs except being important. It’s cool; users love it; it just doesn’t matter. But if you’re living in the future and you build something cool that users love, it may matter more than outsiders think. Microcomputers seemed like toys when Apple and Microsoft started working on them. I’m old enough to remember that era; the usual term for people with their own microcomputers was “hobbyists.” BackRub seemed like an inconsequential science project. The Facebook was just a way for undergrads to stalk one another.
At YC we’re excited when we meet startups working on things that we could imagine know-it-alls on forums dismissing as toys. To us that’s positive evidence an idea is good.
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The clash of domains is a particularly fruitful source of ideas. If you know a lot about programming and you start learning about some other field, you’ll probably see problems that software could solve. In fact, you’re doubly likely to find good problems in another domain: (a) the inhabitants of that domain are not as likely as software people to have already solved their problems with software, and (b) since you come into the new domain totally ignorant, you don’t even know what the status quo is to take it for granted.
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Because a good idea should seem obvious, when you have one you’ll tend to feel that you’re late. Don’t let that deter you. Worrying that you’re late is one of the signs of a good idea. Ten minutes of searching the web will usually settle the question. Even if you find someone else working on the same thing, you’re probably not too late. It’s exceptionally rare for startups to be killed by competitors—so rare that you can almost discount the possibility. So unless you discover a competitor with the sort of lock-in that would prevent users from choosing you, don’t discard the idea.
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You don’t need to worry about entering a “crowded market” so long as you have a thesis about what everyone else in it is overlooking. In fact that’s a very promising starting point. Google was that type of idea. Your thesis has to be more precise than “we’re going to make an x that doesn’t suck” though. You have to be able to phrase it in terms of something the incumbents are overlooking. Best of all is when you can say that they didn’t have the courage of their convictions, and that your plan is what they’d have done if they’d followed through on their own insights. Google was that type of idea too. The search engines that preceded them shied away from the most radical implications of what they were doing—particularly that the better a job they did, the faster users would leave.
A crowded market is actually a good sign, because it means both that there’s demand and that none of the existing solutions are good enough. A startup can’t hope to enter a market that’s obviously big and yet in which they have no competitors. So any startup that succeeds is either going to be entering a market with existing competitors, but armed with some secret weapon that will get them all the users (like Google), or entering a market that looks small but which will turn out to be big (like Microsoft).
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Finding startup ideas is a subtle business, and that’s why most people who try fail so miserably. It doesn’t work well simply to try to think of startup ideas. If you do that, you get bad ones that sound dangerously plausible. The best approach is more indirect: if you have the right sort of background, good startup ideas will seem obvious to you. But even then, not immediately. It takes time to come across situations where you notice something missing. And often these gaps won’t seem to be ideas for companies, just things that would be interesting to build. Which is why it’s good to have the time and the inclination to build things just because they’re interesting.
Live in the future and build what seems interesting. Strange as it sounds, that’s the real recipe.
There is probably no bigger defender of bold founder vision — understanding that it is the underlying point of a start-up — than Vinod Khosla.
Khosla has a post yesterday on TechCrunch, where he reaffirms those values, and he explains how investors and boards should work with founders. Here is an excerpt:
Simply put, the success of a company often hinges on its execution of the founder’s vision. I prefer great vision and bad execution to bad vision and great execution. Companies are not “fire and forget.” In most cases, founders need to be continually involved to ensure that the vision is pursued relentlessly and updated incrementally as the team gains more experience. Every tactical decision a company makes should be tested for its consistency with its vision or the ship will drift toward convenience and short-term actions instead of staying true.
I firmly believe that staying true to a vision is best achieved by having a founder as CEO. It is almost always preferable over “hired guns” that can help you execute on the vision but seldom understand it as well and are often too pragmatic. That said, a management hire can be very much a champion of the vision and a true partner with the founder. Good managers are seldom unreasonable, and it takes “unreasonable people” to do the sorts of great things that normal reasonable people wouldn’t consider until you showed them enough proof that it can be done. For that reason among others, boards should try as hard as possible to keep the founder in the No. 1 slot with a good president/COO or an otherwise strong execution team under him or her. This will preserve their instinctive feel for the new space and the new rules.
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In general, founders do better when path-to-market is very exploratory and rules need to be broken and “new wisdom” needs to be created. Managers/leaders do well when the path is clear, the industry is entrenched, and the product is an “expected service.” In old markets, it’s critical to have a laser-focused VP of sales who knows how to incentivize and motivate the sales team to go further than they would on their own. The playbook differs depending on whether you need to simply know your customers well, as any good salesperson does, or if you have to re-educate them and evangelize a totally new solution to problems the customers may not know they have.
My comment on Chris Dixon’s post discussing the Internet and principal-agent problems:
In addition to incentives, one of the primary factors underlying principal-agent divergence are information asymmetries.
Mitigating those information asymmetries is something the internet is very good at. e.g.. widely available price information drives prices toward marginal cost and makes it less likely we are ripped off; kickstarter, etsy, sidetour, github, behance, kaggle and other talent elevation platforms can make it easier to find authentic talent instead of relying on mediating people or shortcuts such as resumes or various brand names; opinion creation by bloggers instead of just talking heads, etc..
By mitigating them, networks instead of institutions largely get “more efficient” results, e.g., lower prices, recognition of better talent, a more accurate reflection of views in society, etc.
What do you do when you are a technology company with the following confluence of factors: you have huge cash piles, are in a low-interest rate environment where those cash piles are not returning much outside the business, and have a lot of runway left in your business model. Moreover, some of your customers are credit-constrained in an environment where banks are cautious in making loans to this class of customers, so you are not taking full advantage of your runway.
In a new and interesting trend, Internet giants such as Google and Amazon are answering this question by employing their cash piles to offer credit to their small business customers. These small business customers are also the type of businesses that are having trouble getting credit to grow their own business.
Google is offering customers up to $100,000/month to finance the use of AdWords, while Amazon is offering loans to finance inventory for independent sellers on Amazon. And by their customers growing their businesses, Google and Amazon put their fortress balance sheet to use while continuing to prime their own growth. As long as they make smart credit decisions, this seems like a win-win for their bottom-line as well as for their credit-starved business customers.
As I noted a month ago, quoting Warren Buffett, airlines are a horrible business. On the other hand, the business of selling airplanes to airlines is tremendous.
The same backwards logic applies to another business ancillary to airlines, the global distribution systems or GDSs. The world’s carriers pay $7 billion to the GDSs, while the collective profits of all global airlines are only $3 billion. On this blog where a topic of constant interest is the creation of electronic marketplaces, GDSs are an important case-study of a particularly successful example. The Economist has put together a nice history of GDSs. An excerpt:
At the dawn of the internet age, airlines assumed that the middlemen who came between them and their passengers were headed for extinction. Travellers would eventually buy tickets either from the airlines’ own websites or from price-comparison engines which hooked up directly to the airlines’ computers over the web. So why pay commissions to agents? And why continue to own reservation systems, especially since regulators had stopped them from fiddling with travel agents’ GDS screens to place their own flights at the top? So Lufthansa, Air France and Iberia sold most of their shares in Amadeus (the largest GDS); American Airlines sold Sabre; British Airways and KLM sold out of Galileo; and so on.
However, the loss of direct commission from airlines made travel agents more beholden to the GDSs, which not only slip them a share of fees but also provide their back-office computing. Many online travel agencies have come to resemble physical ones, signing up with a GDS which provides a reservations system and other computing power while handing them a commission (ultimately paid by the airlines) on every booking. Despite airlines’ efforts to make travellers bypass agents and come to their own websites, less than half of flights are booked this way.
I had posted seven months ago about how Uber was confining itself to the head of its demand curve. I found that confusing.
Let me say. I’m beginning to get it with UberX, the announced tier of service priced to be competitive with taxi services.
I love that Uber is willing to cannibalize itself.
I love that they worked to perfect the experience on the high-end, and now they are taking the learning to the meat of the market.
I love that they are taking on the authorities stuck in the Stone Age — like this week in DC — gaining bucket loads of attention and attracting fans to the mission.
I love the loyalty generated in the high-end business and how it’s being drawn on now — witness all of those on Twitter and elsewhere willing to testify about why they love the service today, e.g. James Fallows and the pleasure of certainty, and witness the power of logic and customer benefit trump the usual nonsense that happens in the backrooms to protect insiders.
I love the loyalty they have developed among their drivers and fleets, as demonstrated by the apparent fact that drivers and fleets are investing and purchasing hybrids to take part in UberX.
This is a company that’s doing it right — taking on a fossilized industry, bringing to it the information and control that the Internet provides to consumers, empowering suppliers, and making the right tactical and strategic moves in rolling itself out.
In no small part from the example of Amazon, I associate the Internet with pushing down the price of goods. Through giving people easy access to pricing information, consumers can see if they are paying too much. Consumers have an incentive to go with the cheapest price, all other things equal, and, in a world of easy entry, some supplier will take the low price route as the Internet makes the possibility of making money through volume possible. With Amazon doing that in so many product categories, it leaves other merchants — online and offline — no place to hide other than a stab at flawed strategies, such as making products not comparable by changing model numbers and small specs.
So from a price transparency/easy entry/low barriers to entry perspective, the Internet is bad for sellers from a pricing power perspective.
The one thing I had not considered is that the Internet can be an enabler of price discrimination — when the same good or service from the same provider is sold at different prices. One view of “efficiency,” clearing the most transactions by pricing at each customer’s reservation price, is enabled by price discrimination, i.e., if Apple could price iPads at each person’s reservation price — the people who value it at $1000 and the customers who value it at $250, it would sell even more iPads.
Now, off the Internet, there are all sorts of clever ways to price discriminate. You can offer the product with different features or different forms. Apple offers iPads at a low, medium, and high price by varying the memory included. With movies, you had first-run and second-run movies along with PPV, DVD, and cable windows. With books, you have hard cover and soft cover.
In other industries, it’s relatively accepted by the consumer that everyone pays a different price for the same product, as long as the pricing is not completely individualized. Everyone, at a certain time, should have the same shot. Think of airlines and hotel rooms.
In some other industries, the supplier can achieve price discrimination through individual negotiations, individualized discounts, and sales people. A simple version of this is an Indian bazaar, where you are expected to bargain, and tourists with deep pockets walk out paying a high price, while locals pay a low price.
But there is still a cultural resistance to price discrimination in many areas of commerce, where we feel ripped off learning we paid more than another customer. I get annoyed when I walk into a Best Buy and a Barnes and Noble and their in-store product is priced more than the website, even though from a certain sense (but not other) it makes sense.
You clearly couldn’t have digital price tags that changed price depending on the customer, and whether his wallet was tightly closed or the money was burning to get out, at your local Walmart. But this possibility is a reality on the Internet, because the retailer can easier deliver pricing without revealing the price offered to other customers. The problem is that when it gets out; there is outrage. The example weighing on the industry concerns Amazon’s test of price discrimination for DVDs in 2000; when it leaked, there was an explosion of outrage, and Amazon had to give the money back.
This interesting story in the Economist introduces us to the world of price customization, shadowy in the sense that customers of the software are not eager to talk about it. Given the increased ability to target ads to customers, it’s a short step to targeting prices. The question, from a customer perspective, is how to do this in a way that doesn’t elicit a backlash. One answer worth thinking about is offering a discount tailored to customer price sensitivity through a bundled price for additional goods at checkout after the customer makes his initial product selections. Using non-transparent discounts through bundling could offer enough cover and opacity to avoid the feeling of rip-off.
But, here’s the point for this post: assuming, and it’s a big assumption, that there is a way to overcome the cultural issues with price targeting, this could be a big turning point for retail.
takingpitches 